I bang on and on here about the necessity of the rule of law. We cannot, if we are to retain any shred of liberty, be ruled by whims and opinions, it must be written down, in advance, what we may and may not do.
However, finance is different:
Giving evidence to the Treasury Select Committee, George Osborne argued that moving regulation into a single institution, the Bank of England, and allowing supervisors to apply their judgement would prevent a repeat of what he described as \”the biggest bank failure in the world\”.
Had the incoming regulatory regime been in place in 2007, he said, RBS would not have been allowed to push ahead with its £50bn ABN acquisition. Labelling the takeover \”a shocking failure of regulation\”, he added: \”After the bank run at Northern Rock, after the credit markets had frozen, the UK regulators allowed RBS to buy ABN Amro.
\”The reason they allowed the merger to take place is because there was nothing that RBS was doing wrong. It ticked every box. There didn\’t seem to be anyone saying, \’Hold on, are we going to allow RBS to buy this enormous Dutch bank?\’
\”What I\’m trying to do is get to a position where the Bank Governor exercises that kind of judgment… The awareness that this is not the moment when we\’re going to wave through huge takeovers.\”
Banking specifically: the liquidity risks of fractional reserve banking are such that it isn\’t possible to have that rules based, tick box approach. It is necessary for there to be, as best we can manage, those wise peeps who look over shoulders and tell people what they may not do.
In essence, taking out a banking licence means that one is giving up that right to a purely law based regulatory regime.
Carving out such exceptions is dangerous of course: as soon as I\’ve said that banking licences mean such there\’ll be someone else saying that of course this applies to commodities, credit cards, ATMs and doorstep lenders. But none of those have that fatal flaw built in in the same way that fractional reseve banking does. All banks, by definition, are illiquid. As Brad DeLong says, if you borrow short and lend long you\’re a bank (and he goes on to point out that if you\’re not borrowing short and lending long then you\’re not a bank): and to extend his point, if you borrow short and lend long you\’re illiquid. Ergo, banks are illiquid by definition.
We could extend this argument a little: the rule of law is necessary except when it isn\’t. As markets are just wonderful, work perfectly, except when they don\’t. Knowing when they don\’t is very difficult in some cases, very easy in others. But making the distinction between when they do and when they don\’t is vital.
As an early morning musing we could try plotting political views perhaps, from libertarian through to Statist. I have a feeling that there would be a very large correlation between those arguing for markets, all the time markets, and rule of law, all the time law, through to those who might, just, allow that markets work well enough in delivering sweeties to kids and that the law has its place, well after the opinions of bureaucrats and politicians.
I being perhaps around the t or h of the \”through\” and Ritchie being somewhere beyond the full stop after the \”ist\”.
But I do think that there\’s a spectrum, almost all of us acknowledging exceptions to either markets or law. The differences being, with the law say, whether it\’s almost anything or those few and peculiar cases when the granting of a specific privilege (say, a banking licence) leads to rules and law not being sufficient.
So there\’s me taking my stance, right in the middle of a logical quicksand. Both the rule of law and markets have their time and place, it being my opinion as to which those are. Quite the point to base a political or economic philosophy on, isn\’t it?